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U.S. Securities and Exchange Commission

UNITED STATES OF AMERICA
Before the
SECURITIES AND EXCHANGE COMMISSION

SECURITIES EXCHANGE ACT OF 1934
Release No. 49243 / February 13, 2004

ACCOUNTING AND AUDITING ENFORCEMENT
Release No. 1957 / February 13, 2004

Admin. Proc. File No. 3-11396


In the Matter of

PERFORMANCE FOOD GROUP COMPANY



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ORDER INSTITUTING CEASE-AND-DESIST PROCEEDINGS, MAKING FINDINGS, AND IMPOSING A CEASE-AND-DESIST ORDER PURSUANT TO SECTION 21C OF THE SECURITIES EXCHANGE ACT OF 1934

I.

The Securities and Exchange Commission ("Commission") deems it appropriate that cease-and-desist proceedings be, and hereby are, instituted pursuant to Section 21C of the Securities Exchange Act of 1934 ("Exchange Act") against Performance Food Group Company ("PFG").

II.

In anticipation of the institution of these proceedings, PFG has submitted an Offer of Settlement (the "Offer"), which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission, or to which the Commission is a party, and without admitting or denying the findings herein, except as to the Commission's jurisdiction over it and the subject matter of these proceedings, which are admitted, PFG consents to the entry of this Order Instituting Cease-and-Desist Proceedings, Making Findings, and Imposing a Cease-and-Desist Order Pursuant to Section 21C of the Securities Exchange Act of 1934 ("Order"), as set forth below.

III.

On the basis of this Order and PFG's Offer, the Commission finds1 that:

Respondent

1. Performance Food Group Company, a Tennessee corporation based in Richmond, Virginia, processes and sells food and food-related products to restaurants, hotels, schools and other businesses and institutions. In 2001, the company had net sales of $3.2 billion. PFG's common stock is registered with the Commission pursuant to Sections 12(b) and 12(g) of the Exchange Act, and is traded on the NASDAQ using the symbol "PFGC." Its fiscal year coincides with the calendar year.

Improper Accounting for Revenue

2. As part of its obligations as a public reporting company, PFG files annual reports on Form 10-K and quarterly reports on Form 10-Q.

3. On March 11, 2002, after the market closed, PFG announced that it had identified certain accounting errors contained in the financial statements prepared by AFI Foodservice Distributor, Inc. ("AFI"), a PFG subsidiary. PFG reported that the improper accounting caused PFG to overstate its own net income by an estimated total of $4 million to $5 million during 2000 and 2001.

4. PFG later learned its internal records overstated the company's net income by a total of $3.9 million during fiscal years 2000 and 2001. As a result of these errors, PFG filed materially inaccurate financial information in its Forms 10-Q for the second and third quarters of 2000 and the first and third quarters of 2001.

5. PFG's inaccurate filings resulted from the reckless conduct of a former AFI executive vice-president and one-time controller ("vice-president"), who was responsible for AFI's accounting functions and financial statements.

6. The vice-president, a licensed CPA, was aware during 2000 and 2001 that, at the end of each month, certain AFI accounts were increasingly out-of-balance, which was a clear red flag of an accounting problem warranting investigation. Yet, he did not take any action to determine the source of the problems. Likewise, he did not contact his superiors or PFG's accounting/finance department to notify them of the problems or to discuss potential solutions.

7. Instead, each month for almost two years, rather than performing the manual reconciliations and calculations necessary to resolve the imbalances, the vice-president simply made a series of arbitrary and increasingly large adjusting entries into the system to produce balanced figures. There was no reasonable accounting principle or practice to justify these entries, which were as large as $3.6 million.

8. The vice-president failed to determine the effect that these arbitrary entries had on AFI's internal accounting records, which he knew PFG used in preparing its Commission filings. Further, he did not notify his superiors or the accounting/finance personnel at PFG about the adjusting entries he made to compensate for the imbalances. In fact, his adjusting journal entries had the effect of concealing the problems from other PFG personnel.

9. As a result of these arbitrary entries, AFI's and PFG's accounting records reflected inaccurate totals for its sales, inventory, accounts payable and costs of goods sold. Further, the cumulative effect of these errors inflated AFI's net income, which, in turn, resulted in PFG's materially inaccurate Commission filings, as noted above.

10. PFG's financial record-keeping and reporting errors were the product of the combination of PFG's structure of autonomous operating companies, its rapid growth through acquisitions, and the resulting delays in implementing an updated, uniform accounting system. The company lacked adequate internal controls and review procedures for its accounting functions.

11. After identifying the problems, the company investigated the matter and restated its results for all of 2000 and corrected its quarterly results for 2001 in its Form 10-K for the fiscal year ended December 31, 2001. PFG also re-issued its Forms 10-Q for 2001. In addition, the company terminated the employment of the vice-president; implemented an updated, uniform accounting system, and improved its internal controls by imposing more rigorous procedures and hiring additional internal auditors.

Violations

12. Section 13(a) of the Exchange Act requires reporting companies to file periodic and other reports with the Commission containing such information as the Commission's rules prescribe. Rule 13a-13, promulgated pursuant to Section 13(a), requires issuers to file quarterly reports with the Commission on Form 10-Q. Rule 12b-20, promulgated pursuant to Section 12 of the Exchange Act, requires "such further material information, if any, as may be necessary to make the required statements, in light of the circumstances under which they are made not misleading." A violation of these provisions is established if annual or quarterly reports are shown to contain materially inaccurate information regarding such items as the issuer's income.

13. Section 13(b)(2)(A) of the Exchange Act requires reporting companies to make and keep books, records, and accounts, which, in reasonable detail, accurately and fairly reflect their transactions and dispositions of assets.

14. Section 13(b)(2)(B) of the Exchange Act requires reporting companies to devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles.

15. As a result of the conduct described above, PFG violated Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 12b-20 and 13a-13 thereunder.

PFG's Remedial Efforts

16. In determining to accept the Offer, the Commission considered remedial acts promptly undertaken by PFG and cooperation afforded the Commission staff.

IV.

In view of the foregoing, the Commission deems it appropriate to impose the sanctions specified in PFG's Offer.

ACCORDINGLY, IT IS HEREBY ORDERED THAT PFG cease and desist from committing or causing any violations and any future violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 12b-20 and 13a-13 thereunder.

By the Commission.

Jonathan G. Katz
Secretary


Endnotes


http://www.sec.gov/litigation/admin/34-49243.htm


Modified: 02/13/2004